Positive and negative cash flow – the basics

Company owners usually struggle with the need to strike a balance between their income and costs, particularly in the early stages of their business. In fact, even the most profitable companies experience concerns over cash flow at the start.

You can check the cash flow of your company by noting patterns in your expenditure and revenue. There may be instances when you notice your cash flow is negative. But what does negative cash flow mean? How do you avoid negative cash flow?

Positive and Negative Cash Flow – The Basics

Before zeroing in on negative cash flow, let’s talk about the basic difference between positive and negative cash flow.

Positive cash flow occurs when more money is coming into your business than going out, whereas negative cash flow happens when more money is going out than what’s being made.

For example, a property with positive cash flow generates more income than it costs to maintain. Conversely, a property with negative cash flow costs more money for upkeep than it brings in from rentals.

Causes of Negative Cash Flow

The first thing to do if your company experiences negative cash flow is to remain calm. There are many reasons why even a healthy business would have negative cash flow and strategies to address negative cash flow.

Below are the typical causes of negative cash flow:

  • Expenses and income mismatch.When your income and expenses within a specific period are misaligned, you may experience negative cash flow. For example, there are months when you need to replenish your inventory or supplies, thereby resulting in more expenses. You can manage these occasional negative cash flow periods through planning and by ensuring you have enough funds set aside for critical and emergency business expenses.
  • Major purchases or expenses.When you purchase new equipment for your business (e.g., a delivery van or truck) or make a lump sum payment for a new commercial space, it can impact your balance sheets for that period. However, these won’t impact your business negatively in the long term. You may even experience more cash flow the following month because of the new delivery truck since you can now cater to more customers. In any case, an alternative to company-funded purchases would be to apply for financing.
  • Businesses that thrive during certain seasons (e.g., a surfer’s bar or eco-lodge during the summer) or sporting events (e.g., hotdog or nacho carts) also experience revenue fluctuations. Negative cash flow during off-periods isn’t worrisome as long as your annual cash flow remains positive.

However, other than the above, there are also problematic causes of cash flow that require serious intervention:

  • Unsustainable business model
  • National emergency, economic crisis or recession
  • Theft or fraud

These can be internal or external factors, or both – as in the case of theft or fraud. If the problem is your business model, you can always rework it. If it’s theft or fraud, you’ll need to re-evaluate your systems and processes, aside from identifying and penalising the perpetrators. A national crisis, however, is beyond your control and can affect your business earnings and solvency if it causes you to lose profit over the long term.

What’s crucial to remember is that persistently negative cash flow can seriously hurt your business. However, if your company’s cash flow issues are short-term, there are viable solutions available.


If this article has inspired you to think about your own unique situation and, more importantly, what you and your family are going through right now, please contact your advice professional.

(Feedsy Exclusive)

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